What are the key terms in a Distribution Agreement?

A distribution agreement is an agreement between a supplier and a distributor under which the distributor agrees to purchase the supplier’s products and resells them to customers at a price determined by the distributor. This article will look at 3 of the key matters to include in a distribution agreement.

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Type of appointment

A first matter to include in a distribution agreement is the type of appointment. Generally,  there are three options available for the supplier when appointing a distributor. The first option is an exclusive distributor. When an exclusive distributor is appointed they are the only distributors allowed to sell the product in a specific territory. The second option is a sole distributor. A sole distribution agreement is similar to an exclusive distribution agreement in the sense that no other distributor is allowed to sell within the territory. However, the main difference is that under a sole distribution agreement, the supplier reserves the right to sell directly to customers within the territory. The third option is a non-exclusive distributor. Under the non-exclusive distribution agreement, the supplier can appoint as many distributors as they see fit.

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Territory

The second matter to include in a distribution agreement is the territory. A distribution agreement is an agreement that is limited to a specific territory, accordingly the territory must be clearly defined. If the territory is not defined then the distributor might end up operating in a territory that has a preexisting distributor and accordingly breach the agreement between the supplier and the other distributor. Additionally, lack of territorial definition will make it harder for the supplier to hold the distributor accountable for not achieving the agreed sales or alternatively cause an excessive demand by the distributor due to a wider market than anticipated.

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Price and payment terms

The third matter to include in a distribution agreement is the price and payment terms. A distribution agreement is essentially an agreement for sale and accordingly the price at which the products are sold to the distributor must be defined. Otherwise, if the price is not set the distributor will face difficulties pricing the product and marketing it. Additionally, the agreement should include a mechanism for increasing the prices due to inflation or anything that affects the costs of the supplier. The agreement should also set out the payment terms such as the time frame for the distributor to settle invoices.

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In brief, a comprehensive distribution agreement should address the key matters regarding the relationship between the supplier and the distributor. Key among these matters are the type of appointment, territory and the price and payment terms among other things.

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